Largecaps look cheap, but further fall possible

MUMBAI: The selloff in the market since January has resulted in valuations of benchmark indices falling to their 10year average. Nifty is currently trading at 13.55 times its oneyear forward price to earnings (PE) multiple, and is close to its long-term 10-year average of 13.46 times. Fund managers said the decline in the PE ratio of Nifty suggests large caps are cheap but recommend caution as further declines cannot be ruled out.

Nifty's PE has fallen from 16.45 times, when the index was trading around 9,000 levels during March 2015. The benchmark index has declined over 22% during this period. So far in 2016, Nifty has dropped 12%.

"We have become about 20% cheaper than six months ago," said Nilesh Shah, managing director, Kotak Mutual Fund."Sensex on a trailing basis is almost trading at its historical average level and at lower-end of fair value. However, investors need to remain careful regarding the global market volatility."

Recently , Marc Faber, author of The Gloom, Boom & Doom report, said Indian stocks are coming into buying range because they are now more reasonably priced than they were about nine months ago. "I think export-oriented sectors such as technology and pharma have great longerterm potential," he said.

Mid-cap shares too have fallen, but their valuations remain expensive vis-a-vis blue-chips and small-caps. The BSE Midcap index is trading at a PE of around 15.22 times, while the BSE Smallcap index is trading relatively cheaper at 12.25 times.